Caplin Point Laboratories Ltd. (CAPLIPOINT) - Chairman Speech

Company chairman speech

For all those shareholders who have been enriched by our performance across the last 25years and need to know where we are headed it would be pertinent to explain where we havecome from.

When we entered the business of pharmaceuticals manufacture and marketing we wereunfazed by the challenge of small remote and unprospected markets like Guinea MaliSomalia and Angola.

We set up a business in Guinea when it was considered foolish and dangerous to enterthat country directly from India.

We lost money in Kenya due to unfavourable trading conditions for foreigners.

We ventured to Mogadishu in a cargo plane to operate virtually out of cattle sheds.

The objective was to venture where no Indian pharmaceutical marketing company or traderhad been before. The more dangerous they said it was going to be the deeper one waswilling to venture.

Which is how Caplin Point ventured to Angola in the Nineties. There were two challengesin this African country; we did not know anyone who would be interested in marketing anddistributing products on our behalf; the prevailing environment was so unsafe that it wasusual for businessmen to be held at gunpoint in broad daylight and relieved of theirpossessions.

Even as this reality was forbidding the business reality was that there was a largemarket for the simplest of pharmaceutical products; consumers were willing to pay apremium across the counter for immediate availability. We resolved our challenges througha lateral initiative  we managed a restaurant for Indian cuisine. The decision wasdeliberate; the launch of the restaurant was positioned as high-profile translating intoattractive media visibility; soon the walk-in patrons comprised the citys prominentand influential; we commuted every two months from Chennai to manage operations in thatcountry. The labours paid o; we were able to forge profitable engagements withprospective distributors and our Angola operations starting from the restaurant emergedas the foundation on which the later success of Caplin Point would be built.

The fluid social-political reality of that country was borne out to me one day when acar veered in front of me on a deserted road and I was overpowered by gunmen my bags weresearched and some money appropriated. Later through the restaurant network the gunmenconfessed that they were unable to return the loot because what they had expensed inconducting the raid was considerably larger than what they had been able to recoup.

These may have appeared as unconnected realities; fact is that there was a threadrunning through them. The more dangerous the country the more attractive the prospects;the more unsafe its streets the less competition we encountered. And it was thisrealisation that extended Caplin Point to its next biggest market  Latin America .

2 Latin America. Countries like Nicaragua Honduras Costa Rica PanamaGuatemala Ecuador Dominican Republic and El Salvador. When we first indicated that wewould be venturing into some of these countries to market pharmaceuticals most peoplefelt that they might have heard wrong.

Latin America was beyond the radar for a number of reasons. The region was marked by apatchwork of small countries; the size of pharmaceutical market of each country was lessthan the size of modern global cities; the markets were considered physically unsafe;there was a fear that the existing conditions werent trade-friendly and regulationswere unclear.

At Caplin Point we did several things people baulked at.

It would have been tempting to commission assets in those geographies and manufacturehere; we selected to invest in gathering knowledge about those markets instead.

It would have been usual to consider these markets to be low on the quality curve; weprovided the highest product standards instead.

It wouldve been usual to seek an importer for our products and focus on the nextshipment we instead created last mile logistical solutions for our exclusive agentsassisting them with eectively reaching the stockists and pharmacies directly.

It would have been reasonable to assume that these markets would be limited by choiceand paying capacity; we resolved to create markets through wider choice instead (397product registrations in a country like Guatemala).

It would have been usual to manufacture and market from India; we entered intobusiness-strengthening outsourcing relationships with two of the largest formulationmanufacturers in China coupled with quality control laboratories in China that ensured thedelivery of just the kind of products needed in Latin America .

It would have been easy to dismiss the purchasing power in these small countries; thereality was that the purchasing power for health care products in Latin America was higherthan the bottom of the pyramid-equivalent in India or Sub-Saharan Africa.

The result is that we are one of the largest Indian pharmaceutical companies in LatinAmerica. Over the five years ending 2015-16 we grew our revenues 25 percent.

We generated an average net profit margin in excess of 12 percent over the last fiveyears among the highest percentile in Indias pharmaceuticals sector. In the lastfive years we generated a cumulative cash profit of Rs. 157 crore from our business.

We reported a profit after tax of Rs. 46 crore in 2015-16 (9 months) after expensingRs. 24 crore that was spent on the operations of our showpiece CPIV plant and Rs. 8.64crore that we put into research during the last financial year.

We had virtually no debt on our books at the end of the last financial year.

Going forward we are taking this business ahead through a number of initiatives: thecreation of a marketing interface touching the largest number of pharmacies across LatinAmerica the virtualisation of the conventional retail chain closer engagements withmedical practitioners who prescribe our products and the proposed transformation ofgeneric medicines into trusted brands.

We believe that these initiatives will continue to evolve our marketing businessreinforce revenues enhance margins and strengthen our competitive advantage as one of thefastest moving pharmaceutical companies in the regions of our presence.

3 At Caplin Point it would have been smug for us to conclude that being in the sweetspot as we are a spirit of status quo would keep the engine sustainable.

Nothing would have been further from the truth.

The reality is that even as our marketing-driven business model is only gettingstronger there is a need to prudently invest the cash at our disposal identify marketgaps invest proactively in capability and capacity and prepare the company for its secondgrowth round that could be bigger and faster than the first.

Caplin Point 2.0 is about manufacturing injectables and ophthalmics in a showpieceChennai facility and marketing these products in the largest pharmaceutical market in theworld.

We believe that this is an idea whose time has come for a number of reasons.

The US injectable market is estimated at $144bn.

The injectable space is high on technology with formidable entry barriers and a highrisk-reward proposition.

The domain has until now been considered the preserve of large players where CaplinPoint is a Technology David.

The product is addressing an unmet need being generally in short supply.

The complex injectable molecules attract premium recalculations.

4 There is a growing apprehension among analysts and shareholders about whether wepossess the intellectual and managerial bandwidth to address this opportunity.

The answer is a confident yes based on a number of realities.

One Caplin Point will select to specialise in the complex injectable space withoutdiluting its managerial attention in other commodity spaces of the pharmaceuticalsindustry.

Two the company has selected to enter into an alliance with Fresenius Kabi (Euro 28 bnrevenues 2015) a large company possessing complementary capabilities for a few of thefilings in US.

Three the company has entered into a business-strengthening partnership to launch theproducts in US a relative de-risking against the prospect of going completely alone for alarge opportunity with a lot at stake.

Four there are a little more than a dozen injectable units catering to the RegulatedMarkets among Indias 6000-odd pharmaceutical units which makes the companyimmediately distinctive.

Five the companys showpiece CP IV injectable facility has already been certifiedby the demanding ANVISA and EU GMP certifications awaiting the coveted USFDA which canopen the company to the worlds largest pharmaceutical market.

Six the company is actively securing its knowledge capital through an attractive ESOP.

5 Caplin Points injectable play is not a story of something that is expected totranspire in the future; it is something that has already covered much ground.

The company is already working on a pipeline of 9 ANDAs for US filing within a yearfive on its own account and four with alliance partners.

In this pipeline the company intends to file three ANDAs during the current financialyear for which the USFDA inspection is likely to happen across the coming months.

Our injectable facility has already been certified by EUGMP and ANVISA as well asvalidated by Fresenius Kabis demanding filters enhancing the hope that the plantmay clear screening by USFDA as well.

At our company we have expensed the CP IV from our Profit and Loss Account theinvestment funded through earnings generated from the companys core marketingbusiness in Latin America. Besides the prospective budget that we have created hasexpensed the cost of around eight ANDA filing each year for the next three years blendingsustainability into the estimation and financial model.

We recruited a team of R&D scientists who possess the experience of understandingthe challenges of the US markets and is building a team to prepare the company toindependently launch ANDAs for the most demanding markets in the world.

We believe that even as we continue to report attractive surpluses in our marketingbusiness based in Latin America we have ploughed proceeds from this cash-rich business asseed capital for our cash-intensive business to manufacture injectables for the US market.

I need to assure shareholders that this investment has been largely completed fromaccruals and without equity dilution which we believe will enhance value in the hands ofwho own shares in our company across the foreseeable future.